Wednesday, February 25, 2015

Overhauling New Jersey's Pensions?

Josh Dawsey of the Wall Street Journal reports, Gov. Chris Christie Panel Proposes Overhaul of New Jersey’s Pension System:
Gov. Chris Christie’s committee to study New Jersey’s troubled pension system wants to overhaul the retirement program for public employees, freezing the current setup and replacing it with a “cash balance” plan.

The plan would spread out the current pension system’s unfunded liability over many years, and would more closely reflect benefits in the private sector, according to members of the commission. Mr. Christie endorsed the report conclusions Tuesday in a speech to the Legislature.

The commission is also calling for a state constitutional amendment to require governors to make payments to the new plan.

“Although the proposed plans are likely to be less generous to long-tenured employees as compared with the current plans, a less generous plan that is funded is preferable to a more-generous plan that isn’t,” the report says.

Benefits in the new plan could swing based on fluctuations in the stock and bond markets, introducing an element of risk.

Workers in the system would have their current plan frozen, according to Tom Healey, the commission chairman, and new workers would be entered into the new plan. Employees would have individual accounts, he said.

“You can do lots of different things with a total mess,” Mr. Healey said in an interview. “You can either say, let’s try to fix it or you can move to Wisconsin. We’re at the edge of the cliff here.”

The proposal received pushback from some unions and Democrats. Mr. Healey said he had met with the state’s main teachers union, and said its leaders were cooperative. Other meetings are scheduled in coming weeks.

Wendell Steinhauer, president of the New Jersey Education Association, said the union supports the proposal’s recommendations to freeze benefits of the current pension system, create a newly managed one and adopt a guarantee of state funding in the state constitution.

But Mr. Steinhauer said that some of the pension proposal “unfairly burdens” workers and wouldn’t be feasible.

“There will be many things that NJEA disagrees with, some of them very strongly,” Mr. Steinhauer said in a statement. “This is a report. It is not a law, and it is not the final word on what will or must happen.”

Other states such as Kentucky and Louisiana have recently introduced cash benefit plans, though Louisiana’s plan was ruled unconstitutional.

Joshua Franzel, a vice president for research at the Center for State and Local Government Excellence, said cash benefit plans are a way for states to provide more predictability in their pension systems.

The plans tend to guarantee a certain rate of investment return, but unlike a defined benefit pension system the hybrid ones don’t lock in a fixed allowance based just on the worker’s salary. It shifts some of the risk of market fluctuations to the employee without fully doing so, Mr. Franzel said.

“It’s a middle approach for managing risk and trying to control costs and control liabilities,” said Mr. Franzel, whose center studies pensions. “We are seeing a trend to more states beginning to consider and implement hybrid plans.”

New Jersey’s pension system is underfunded by about $37 billion.

The commission’s report said parts of its approach are likely to be unpopular at first but that “in time they will be viewed as the best way to move forward.”
A little over a month ago, I wrote a comment on taming New Jersey's insatiable beast, explaining why New Jersey's pensions are grossly underfunded and criticizing Gov. Christie's approach to handling their "pension crisis."

On Monday, a judge ruled that Gov. Chris Christie and the state's Democrat-controlled Legislature must find $1.57 billion to put into pension funds for retired public workers. 

And how did New Jersey's feisty governor respond? In a sad attempt to chalk up political points by trying to emulate Wisconsin's popular governor Scott Walker, he responded with a "fiscally responsible" plan to reform his state's pension system (a last ditch attempt to run as a GOP candidate in 2016?).

But New Jersey isn't Wisconsin in any way, shape or form. State of Wisconsin Investment Board is one of the best state pensions in the United States because they got the governance right and are following Canadian funds in managing more of their assets in-house.

By contrast, New Jersey's Division of Investment outsources most of their pension assets and doles out huge fees to private equity funds and hedge funds, one of which employs Gov. Christie's wife. Also, just like elsewhere, there's way too much political interference in their state pension, which virtually ensures mediocre performance over a long period (don't look at the last four years, a monkey could have outperformed in this environment just over-weighting equities).

More worrisome, I'm against these so-called "hybrid" plans because they are nothing more than defined-contribution (DC) plans in disguise placing the onus of risk entirely on members of these plans. And the brutal truth on DC plans is they're far less secure and much worse than DB plans.

Also, while I believe in shared-risk plans if they're done right, the sad truth is converting more public sector workers from DB into DC or hybrid plans is bad economic policy which will only ensure more Americans will retire in poverty.

Importantly, this isn't a conservative or liberal issue. Good pension policy that bolsters defined-benefit plans is good economic policy. The benefits of DB plans are grossly under-appreciated, especially well-governed ones which operate at arms-length from the government.

This is why I'm happy to see New York City is contemplating setting up a pension plan for private workers. As Bloomberg's Megan McArdle notes, details are still sketchy as to whether it will be a DC or DB plan but it will mean people will have to save more now to enjoy a safe retirement later (I disagree with her facile dismissal that "each type has its benefits and drawbacks,' because she doesn't understand the the brutal truth on DC plans).

All around the United States, we're witnessing major problems in public pensions. Last week, I discussed why Chicago and Tampa are the next Detroit. On Tuesday, I read a Bloomberg article on how Kansas and Kentucky may borrow billions to invest in cash-strapped pension funds, undeterred by warnings the practice risks driving up taxpayers’ bills to retirees. Keep in mind, Kentucky is in an even bigger pension mess than Illinois, which speaks volumes on just how dire their situation is.

And how are politicians responding to their pension mess? They're basically ignoring the problem or coming up with dumb solutions which will exacerbate pension poverty down the road and weaken the economy of the United States. This is certainly the case in New Jersey, Illinois,  Kentucky, Kansas and other states struggling to slay their pension demon.

Below, NJTV News provides coverage of Gov. Chris Christie’s 2016 Budget Address. The coverage includes the duration of the remarks and expert analysis (fast forward to minute 25 to listen to Gov. Christie's comments on pensions).

He's right, New Jersey desperately needs to reform its pension system because they can't tax or grow their way out of this problem. But the reforms his administration is proposing are not going to make the problem go away. In fact, these reforms are going to exacerbate pension poverty in New Jersey and weaken their economy, making their public debt much worse over the long run.

To his credit, however, Gov. Christie is calling for a state constitutional amendment to require governors to make payments to the new plan. I think every state should adopt a similar constitutional amendment to top up their existing public pensions every year, not some new hybrid plan New Jersey is proposing.

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